6.3 How to Implement the Operational Risk Management Proposal ...

Ho to Implement the Operational RiskManagement Proposal under Basel II ?Some Viewpoints of China BanksZhao Xianxinzhaoxx@spdb.com.cnShanghai Pudong Development BankTel:86-21 6161600613817578236•Outline of This PresentationI. An Overview of China Banking IndustryII.III.IV.Challenges for Operational Risk ManagementImplications of Basel II Proposal for Our Operational Risk ManagementChina’s Regulatory Guidelines for the Capital Requirement under Basel II2009-1-13 2•1

Challenges for Operational RiskManagement -cont’dMarket Evolutionand Threats of Disintermediation• Stock markets are becoming increasingly important in meetingfinancing needs of companies.• Threat of disintermediation trend-On the lending side, commercial banks have to compete withstock market to attract qualified borrowers.-On the liability side, commercial banks need to providecompetitive return to abstract depositors.• Challenges of Interest rate liberalization.-The 1970s of the US was considered bankers’ “3-6-3” time. Upto date, Chinese bankers have been enjoying this kind of time.-Time is in fast change.2009-1-13 9•Challenges for Operational RiskManagement -cont’dCrime Waves: Internal Theft and Fraud• Following the economy and society transition, internal crime incidenceis increasing.-Before 1999, crimes within banking industry were merely connected toloan business: taking bribery or kickbacks from borrowers were oncevery common.-After 1999, internal crimes take new forms: Stealing money fromclients’ accounts become a new trendy problem. eg. Bank of Chinasuffered a huge amount of losses due to internal money theft.• Following the rapid commercialization of banks, operational risk relatedto people emerges:-Higher turn over rate of staff,-Inappropriate incentive caused by improper compensation package,short sightedness of client manager.2009-1-13 10•5

Challenges for Operational RiskManagement -cont’dCrime Waves: External Theft and Fraud• Retail banking market is growing at fast pace. Unfortunately,there are no effective ways to screen customers.-In mortgage lending business, there is so called “Three Fakes”problem; In credit card business, defaults are increasing.• Safety of IT system.-How to guarantee the security of online banking• It’s increasing hard to manage public relations in the time ofinternet, in particular when some bad news about your bankbegins to circulate.2009-1-13 11•Transformation of the Banking Sector• Banking business in China is en route from traditional model tomodern model.‣ Business lines will play more critical role in daily operationmanagement. More power will be expected to be transferredfrom branches to Head Office.‣ In line with centralized monitoring and reporting, heavyinvestments have been put into IT system.‣ New risk management culture: streamlining the process of creditbusiness.‣ New Accountability Culture: separating operational risk fromcredit risk.‣ Deposit based banking, rather than asset based banking.2009-1-13 12•6

Strengths of Basel II Proposal forOperational Risk Management• Increased transparency both at branch level and business linelevel will help to control operational risk.• Risk tolerance level could be set.• Implementation of Basel II will facilitate the transformationprocess of banking operation.-Management functioned by business line will be strengthened;-Give incentive to improve operational risk management andhenceforth to reduce operational losses.• Encourage banks to allocate more sources to strengthen theiroperational management.2009-1-13 13•China Version of Guidelines for theImplementation of Basel II• Three approaches recommended by CBRC-The Standardized Approach in China Version-The Alternative Standardized Approach-The Advanced Approach• No detail about AMA, reflecting low expectation forimplementation.2009-1-13 14•7

The Standardized Approach of CBRCThe total capital charge canbe expressed asKTSA=∑8{ GIjk× β ,0}∑3maxj= 1k=1k3No Big Difference!Standardized Approach Beta FactorsBusiness LinesBeta FactorsCorporate Finance 18%Trading & Sales 18%Retail Banking 12%Commercial Banking 15%Payments & Settlements 18%Agency Services 15%Asset Management 12%Retail Brokerage 12%Other Business 18%2009-1-13 15•The Alternative StandardizedApproach of CBRCTwo Choices under CBRC ASAOne is the same as ASA under Basel II, the otheris pretty much a short version.ASA Beta FactorsBusiness Lines Beta FactorsRetail Banking 12%*3.5%*aloCommercial Bankin 15%*3.5%*aloOther Business 18%2009-1-13 16•8

Advanced Measurement ApproachShould be No Difference!2009-1-13 17•谢 谢2009-1-13 18•9